Special provisions relating to certain income of non residents, Introduction to transfer pricing, APA, Double taxation Relief CA Kiran J. Nisar 1
Chapter XIIA : Special Provision relating to certain income of non-resident Provisions applicable only to NR and only in respect of specified incomes Income of NR not covered by this Chapter will be taxed as per Normal Rates of tax These provisions are OPTIONAL Few Definitions (S. 115C) Non-Resident Foreign Exchange Asset Investment Income Long-term Capital Gain CA. Kiran Nisar 2
Chapter XIIA : Special Provision relating to Section 115D certain income of non-resident Investment income & LTCG No deduction allowed in respect of expenses incurred No Chapter VI-A deduction allowed Basic exemption limit not allowed to be adjusted In respect of LTCG: expenses on transfer will be allowed, but benefit of indexation not allowed CA. Kiran Nisar 3
Chapter XIIA : Special Provision relating to certain income of non-resident Rate of Tax (S. 115E) Investment Income 20% LTCG -10% Surcharge and Education cess as applicable If income of NR includes any other income, -the same will be taxed at normal rates Exemption on LTCG (S. 115F) Net sale proceeds to be utilized within 6 months from the date of transfer Purchase of another forex assets NSC certificates Exemption withdrawn if newly acquired asset is transferred/ converted within 3 years LTCG taxed in the year of violation CA. Kiran Nisar 4
Chapter XIIA : Special Provision relating to certain income of non-resident Section 115G No need to file Return of Income If no other income except investment income & LTCG Tax on such income has been correctly deducted at source Section 115I : OPTIONAL If normal provisions are found more beneficial, assessee can opt for the same by filing ROI Option can be changed on year to year basis CA. Kiran Nisar 5
Chapter XIIA : Special Provision relating to certain income of non-resident Section 115H On becoming Resident by default normal provisions shall apply Special provision apply only till the assessee holds such forex asset, except shares of Indian Company ROI to be filed for availing these provisions along with an application addressed to AO CA. Kiran Nisar 6
S. 44B Sp. Provision for computing profits and gains of shipping business of non-resident Applicable to non-resident engaged in the business of operation of ship 7.5% of specified amount shall be deemed to be profits and gains of such business Specified amounts: Amount paid/payable in respect of carriage of goods, passengers, livestock, mail or goods shipped at any ports in India Amount received/ deemed to be received in India on account of carriage of goods, livestock, mail or goods shipped at any ports outside India Include demurrage charges or handling charges or any other amount of similar nature CA. Kiran Nisar 7
Section 44BB : Profits and gains in connection with business of exploration Non-resident engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire to be used in prospecting / extraction /production of mineral oils 10% of specified amount Amount paid/payable for prospecting, extraction, production of mineral oils in India Amount received or deemed to be received - for prospecting, extraction, production of mineral oils outside India CA. Kiran Nisar 8
S. 44BBA : Profits and gains of the business of operation of aircraft by non-resident Non-resident engaged in the business of operation of aircraft 5% of specified amount Amount paid/ payable on account of carriage of passengers, livestock, mail or goods from any place in India Amount received or deemed to be received on account of carriage of passengers, livestock, mail or goods from any place outside India CA. Kiran Nisar 9
Introduction to Transfer Pricing CA. Kiran Nisar 10
Introduction to transfer pricing Globalization is the business reality majority of the cross boarder transaction happens between related party Simple illustration: Scenario 1 Scenario 2 A B A B Profit 300 100 100 300 Tax 90 15 30 45 Total Tax 105 75 Transfer price therefore tends to shape the tax base of the countries involved in cross-boarder transactions Indian TP regulation - Section 92 to 92F Rule 10A to 10E S. 92 Any income arising from an international transaction shall be computed having regard to arm s length price (allowance of any expense/ interest) No impact if ALP result in to reduction of income/ increasing loss CA. Kiran Nisar 11
Transfer pricing - Process Understand the business - Identify AEs and international transactions Analysis of international transactions, FAR and characterisation Selection of Tested Party Selection of Most Appropriate Method Searching for and identifying potential comparables (economic adjustments) CA. Kiran Nisar 12
International transactions Transactions between two or more AE Transaction with Non AE if there exist a prior agreement between such other person and AE Either or both of whom are non-resident Purchase, sale or lease of tangible/ intangible property Provision of services Lending/ borrowing of money Any other transactions having a bearing on profits, income, losses or assets of such enterprises Arrangements for allocation/ apportionment of any cost/ expenses Etc. Such transactions need not be formal or in writing and need not be legally enforceable CA. Kiran Nisar 13
Scope of section 92 Guarantee given by the AE Deferred receivable/ payable Issue of equity/preference shares Exit charge paid on conversion of a manufacturer to a toll manufacturer transaction of business restructuring/ reorganisation CA. Kiran Nisar 14
Associated Enterprises AE has direct / indirect participation in the Management, Control or Capital [S. 92A] Controlled by Capital Holding directly/indirectly not less than 26% of shares voting power Loan not less than 50% of book value of total assets Guarantee not less than 10% of borrowings from another Holding not less than 10% interest in Firm, AOP, BOI Controlled by Management More than half of board of directors or one or more executive directors are appointed by another enterprise More than half of the directors or one or more of executive directors of each enterprises are appointed by same person CA. Kiran Nisar 15
Associated Enterprises contd. Other Control The manufacturing/ processing is wholly dependent on other enterprise 90% or more of the raw material/ consumable are supplied by the other enterprise / prices are influenced by other enterprise Goods manufactured are sold to other enterprise and prices are influenced by other enterprise Where one enterprise is controlled by an Individual/ HUF and other enterprise is controlled by such individual or his relatives or member of such HUF or relative of such members CA. Kiran Nisar 16
Associated Enterprise Case Study B (25% in XYZ) Mr. C Mr. A (hold 100% in ABC and 25% in XYZ) ABC Incc. XYZ (Indian Partnership) A, B and C are the Partners in XYZ International transaction between ABC and XYZ Test whether ABC and XYZ are AE? If B is not a relative of A If B is relative of A If B is a Company controlled by A If ABC becomes Partner holding 5% interest in XYZ CA. Kiran Nisar 17
Function, Assets and Risk Analysis (FAR)- Illustration FAR Oversea Parent Ind. Co FUNCTION Performed Manufacturing Activity P Procurement of Raw Material P Inventory management P Marketing P ASSETS Deployed Plant & Machinery P Other Assets P P Know-how P Trademark P CA. Kiran Nisar 18
FAR Illustration contd. FAR Oversea Parent Ind. Co RISK Assumed Market risk Inventory risk Credit risk P P8 Capacity risk Workmanship risk Product liability risk Tested Party? Oversea Parent Entrepreneur Ind. Co Contract Manufacturer Indian Contract manufacturer will have limited credit risk P P P P CA. Kiran Nisar 19 P P
Tested Party First step for selection of most appropriate method Selection of tested party based on functional analysis The one to which TP methods can be applied in reliable manner Least complex entity for which reliable comparable can be found CA. Kiran Nisar 20
Arm s Length Price (ALP) Price in a transaction with Non-AE in uncontrolled conditions Computation of ALP Determined using most appropriate method If more than one price Arithmetic means of such prices No adjustment if the difference is within the tolerance band CA. Kiran Nisar 21
Transfer Pricing Methods The five major transfer pricing methods are Comparable uncontrolled price (CUP) Resale price method (RPM) Cost plus method (CPM) Profit split method (PSM) Profit Comparison Method (TNMM) Recently one more method introduced Appropriateness of method based on: Functional Analysis Availability of reliable information Degree and reliability of comparability CA. Kiran Nisar 22
Comparable Uncontrolled Price (CUP) Method One of the five method prescribed u/s. 92C(1) Most appropriate method OECD TP Guideline Para 2.3 Moreover, where, taking account of the criteria for comparability, the CUP and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred Also endorsed in various judicial decision CA. Kiran Nisar 23
CUP Income Tax Rules, 1962 IT Rules are in line with OECD TP Guidelines (Chapter II, Section B) Rule 10B(1)(a) Comparable uncontrolled price method, by which- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is defined; (ii) Such price is adjusted to account for difference, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) The adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction Rule 10B(2) The comparability of an international transaction with the uncontrolled transaction shall be (a) judged with reference to the following, namely- The specific characteristics of the property transferred or services provided in either transaction; (b) The function performed, taking into account assets employed or to be employed and the risk assumed, by the respective parties to the transactions; CA. Kiran Nisar 24
CUP Income Tax Rules, 1962 Rule 10B(2) (Continued) c. the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risk and benefits are to be divided between the respective parties to the transactions; d. Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail Rule 10B(3) An uncontrolled transaction shall be comparable to an international transactions if- (a) none of the difference, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid, or the profit arising from, such transaction in the open market; or (b) reasonably accurate adjustments can be made to eliminate the material effect of such differences CA. Kiran Nisar 25
Application of CUP Method Most direct and reliable way to apply arm s length principle - but can be used in case of strong similarity of products or services Difficult to find a transaction between independent enterprises that is similar to a controlled transaction with no material differences Para 2.16 of OECD TP Guidelines In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business function other than just product comparability Other comparability factors Level of market (Wholesale or Retail) Volume Geographical differences Timing of transaction Contractual terms, such as credit period, currency, after sales service, etc. Intangible property associated with sale CA. Kiran Nisar 26
Some of the Judicial view on comparability factor The relevant market condition for testing a transaction is the market where goods are sold and not the place of origin Purchase from newly developed third party Chinese suppliers cannot be used on the ground of risk associated with uncertain quality standard Due to significant volume and geographical differences between sales to AE and non-ae, CUP method was rejected CUP method is more appropriate where reliable data is available purchase of API for generic drugs custom data base Internal CUP would not be suitable where the quantity exported to AE is on wholesale basis while sold to third parties is on retail basis CA. Kiran Nisar 27
Typical transactions where CUP is applied Goods traded on exchange or products whose prices are available in public domain, e.g. metals, coffee, commodities, etc. Financing transactions / Guarantee transactions Purchase and sale of listed shares Tangible & Intangible assets royalties CA. Kiran Nisar 28
Resale Price Method (RPM) Rule 10B(1)(b) i. the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; ii. iii. iv. such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between 55 [the international transaction or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; v. the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; CA. Kiran Nisar 29
RPM Used when purchase from related party for resale to unrelated party Ideal for trading/distribution activity Used when Reseller does not add substantial value to the goods Used when Reseller does not apply intangible assets to add value Better when goods sold within short span else more adjustment like, exchange rate, inventory cost CA. Kiran Nisar 30
Steps for RPM Identification of resale price by tested party Resale price reduced by normal gross profit with reference to uncontrolled transactions Such price reduced by expenses incurred (custom duty, etc.) in purchase of the product/ service This price may be adjusted to account for functional and other difference, if any Adjusted price arrived above taken to be ALP CA. Kiran Nisar 31
Illustration of RPM Tax payer has imported goods from AE and also from 3 rd Party Import from AE Import from Non-AE Step 1 Resale price per unit 250 250 No. of unit sold 200 100 Resale price in Rs. 50,000 25,000 Step 2 Less: Normal Profit margin 28% Purchase price 18,000 Gross Margin 14,000 7,000 [28%] 36,000 Step 3 Expense if any Step 4 Adjustment if any (Mkt. fn.) 2,000 Step 5 ALP of import 34,000 CA. Kiran Nisar 32
RPM Adjustment under RPM for material differences Inventory levels and turnover rates Sales, marketing and advertising programs The level of market, wholesale or retail Accounting practices Use of tangible/ intangible assets Foreign currency risk Contractual terms, i.e. pricing, warranty, credit, volume term CA. Kiran Nisar 33
Few decisions on RPM ITO v. L oreal India P. Ltd. (ITA No, 5423/Mum/2009) There is no order of priority in selection of methods. RPM is one of the standard method and the OECD guidelines also states that in case of distribution and marketing activities (where goods are purchased from AEs and sold to unrelated parties) RPM is the most appropriate method. Gharda Chemicals v. DCIT (ITA No. 2242/MUM/06) RPM could be applied only in cases where Indian entity had purchased goods from its AE St. Jude Medical India P Ltd v. DCIT (ITA No. 1626/HYD/2010) Only goods sold could be considered while determining ALP and unsold goods would have to be excluded. Further, under RPM, price needs to be considered after applying GP margin on sales and accounting for functional, economic and working capital differences CA. Kiran Nisar 34
Cost Plus Method Rule 10B i. the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; ii. the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; CA. Kiran Nisar 35
Cost Plus Method iii. iv. the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); v. the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; CA. Kiran Nisar 36
Steps for CPM 1. Ascertain the direct and indirect cost of production 2. Ascertain normal gross profit mark-up 3. Adjust the normal GP mark-up referred above to take in to account the functional and other differences 4. The cost referred in 1 above are increased by the adjusted GP mark-up referred in 3 above 5. The sum so arrived is an arm s length price CA. Kiran Nisar 37
CPM This method is ideally used in cases involving manufacturing, assembling or production of tangible products or provision of services that are sold / provided to AE s Requires high level of comparability between the tested party and the comparable in terms of functions performed CA. Kiran Nisar 38
Some of the key aspect of CPM Focuses on gross profit margins, which are heavily influenced by the scope, intensity of functions and accounting methods Difference in the cost base may require adjustment for proper comparability Internal v external comparable Internal comparable more reliable fewer adjustment is required to internal comparable CA. Kiran Nisar 39
CPM Illustration Company A Manufacturer- sells goods to AE in UK AE in UK is engaged in distribution of goods in UK Also sells directly to customers in India an other countries CPM can be most appropriate internal comparable can be used split P&L in 3 segment AE, Exports and Domestic CA. Kiran Nisar 40
Profit Split Method (PSM) Rule 10B(1)(d) The PSM is applied in complex situations when other available methods (such as CUP/ TNMM) are not sufficient to price the function performed PSM is usually appropriate when: Transactions are very interrelated such that they cannot be evaluated on a separate basis Valuable, non-routine intangibles exist in transactions and profit arising to the group cannot be assigned to one of the entities of the group Significant differences between controlled and uncontrolled transactions are attributable to economies of horizontal/ vertical integration Adequate comparable are unavailable to set margins for all the entities CA. Kiran Nisar 41
PSM There are two forms of PSM Comparable Profit Split Method Or Contribution Method Residual Profit Split Method CA. Kiran Nisar 42
Steps for PSM The combined net profits of the associated enterprises arising from the international transaction is determined The relative contribution made by each of the AE to the earning of such combined profit is then evaluated On the basis of function performed, assets employed/ to be employed, risks assumed On the basis of reliable market data which indicate how such contribution would be evaluated by unrelated enterprise performing similar function The combined net profit is then split amongst the enterprise in the proportion of their relative contribution The profit thus attributed as ALP CA. Kiran Nisar 43
Steps for RPSM The combined net profit in first instance is partially allocated to each enterprises The residual profit is then split in proportion of relative contribution 1. Define the correct pool of global profit 2. Identify routine activities 3. Determine functional returns for routine activities 4. Determine residual profit pool 5. Determine value driver or objective keys to apportion the residual profit CA. Kiran Nisar 44
PSM - Illustration Typically PSM is used in Telecommunications/ Pharmaceuticals Industries Illustration Assume that there exist a company which is responsible for broadcasting content through various channels all over the world This company through its subsidiaries provide television network feeds to various broadcasters around the world. Each subsidiary company is responsible for content development and transmission to broadcaster To ensure appropriate content development, each subsidiary perform R&D on multimedia related area These subsidiary bears risk of appropriate content, delivery and standard routine transfer pricing risk CA. Kiran Nisar 45
Illustration Contd. Particulars India US UK Singapore UAE Gross Revenue (a) x x x x x 3 rd Party cost (b) y y y y y Net Revenue (c) = (a) (b) 150 80 160-15 -5 Routine Returns 85 30 145 10 5 Residual Profit 65 50 15-25 -10 Allocation ratio 0.3 0.1 0.20 0.25 0.15 Allocation Amount 28.50 9.50 19.00 23.75 14.25 PBIT after TP Adjt. 113.50 39.50 164.00 33.75 19.25 CA. Kiran Nisar 46
PSM Practical Challenges Third parties in general do not use profit split method to establish transfer prices Evaluation and measurement of the value drivers / intangibles element of subjectivity Requires use of data from foreign locations Difficulty in calculating the combined revenue and costs for all the AEs CA. Kiran Nisar 47
Transactional Net Margin Method (TNMM) Most frequently used method due to lack of availability of comparable uncontrolled price and gross margin data required for CUP/ CPM/ RPM Broad level of product comparability and high level of functional comparability CA. Kiran Nisar 48
Transactional Net Margin Method (TNMM) Net margin realized by the enterprise from an international transactions with AE is computed in relation to Sale effected, assets employed, other relevant factor Net margin realized from comparable uncontrolled transactions is computed with regard to same base Net margin in uncontrolled transaction is adjusted to take into account, difference if any, between international transaction and uncontrolled transaction CA. Kiran Nisar 49
TNMM Most frequently used and practical method Applicable for any type of transaction Comparison at operating margin level Broad level of similarity of functions, Assets and risks (FAR) Net margins are more tolerant to functional differences Selection of the right comparables and PLI are critical factors CA. Kiran Nisar 50
TNMM - ILLUSTRATION Indian manufacturer (IP is with overseas parent) imports some parts from AE Revenue from end customer = INR 100 and other operating cost = INR 15 PLI Cost base PLI cannot be used as cost is affected by TP Assets based PLI cannot be used in absence of information of comparable company s asset base Net profit margin seems to be most appropriate External benchmarking suggest net profit margin of 10% TP = INR 100 INR 10 INR 15 = INR 75 CA. Kiran Nisar 51
Other Methods Rule 10AB The other method for determination of the arms' length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. Some Practical Examples Cost sharing arrangements Purchase/ sale of fixed assets Transactions supported by valuation reports Third party quotation (guarantees, derivative transactions etc.) CA. Kiran Nisar 52
Most Appropriate Method Method CUP/ Other Method RPM CPM PSM TNMM Typically used for Transactions Loans, Royalties, Service fee, transfer of tangibles, guarantee fees Marketing operations of finished products, where distributor does not performing significant value addition to product Sale of finished / semi-finished goods or services Transactions involving provision of integrated services by more than one enterprise or involving unique intangibles Provision of services, manufacture / distribution of finished goods and guarantee fees CA. Kiran Nisar 53
Domestic Transfer Pricing Partially existent way before introduction of TP Expenditure in respect of which payment has been made to related parties referred to in Section 40A(2)(b) can be disallowed if it is excessive having regard to the fair market value Computation of tax holiday of eligible undertakings based on fair market value of goods / services, in case of transactions with other units in the same legal entity and based on ordinary profits in case of transactions with closely connected persons Supreme Court in the case of Glaxo SmithKline Asia (P) Ltd. suggested in its order that TP regulations be made applicable where fair market value needs to be assigned to transactions between domestic related parties S. 92(2A) Any allowance for expenditure or interest or allocation of any cost, expenses or income in relation to SDT to be computed having regard to ALP No impact if ALP result in to reduction of income/ increasing loss CA. Kiran Nisar 54
Scope of Domestic Transfer Pricing Specified Domestic Transactions (SDT) [S. 91BA] Section 40A(2) Disallowance of expenditure in excess of arm's length price for transactions between related parties. Tax Holiday Unit Any Transfer of goods and services between eligible unit and non-eligible unit - whether at market value? Transactions with entities having close connection whether earning ordinary profits? CA. Kiran Nisar 55
Domestic Transfer pricing Case Study 1. Company X has given a loan to Company Y (where X and Y are AE) What is the implication of such loan is interest free Will the answer change, if Company Y is enjoying tax holiday What if X charges interest @ 18% where ALP of interest is 12% 2. Cost Allocation : P&L Account Cost allocation Cost plus allocation Sales 100 100 Cost of sales 65 65 Allocation of HO cost 20 22 Profit 15 13 CA. Kiran Nisar 56
Domestic Transfer pricing Case Study Transfer of undertaking within the group company, i.e. by Co.1 to Co.2 Whether transfer of undertaking is specified domestic transaction Consider two scenario 1) where transfer happens at book value and 2) where transfer happens at FMV If undertaking enjoys tax holiday whether DTP provision would be invoked? Particular Scenario 1 Scenario 2 Sale 100 100 Cost of sale 60 60 Adm. cost 15 15 Depreciation 6 10 Profit 19 15 CA. Kiran Nisar 57
Advance Pricing Agreement CA. Kiran Nisar 58
Advance Pricing Agreement (APA) Key features Broadly similar to APA scheme of other countries Agreement between tax payer and CBDT To determine ALP Specify the manner in which ALP has to be determined Can be unilateral, bilateral or multilateral Binding on tax payer and tax authority in respect of such transaction Use of any method (whether specified or not) with adjustments/ variations as necessary Application should be filed Before undertaking a proposed transaction or For continued transaction before 1 st day of relevant fiscal year, i.e. 1 st April Valid for a maximum period of 5 consecutive years Provision for renewal CA. Kiran Nisar 59
Advance Pricing Agreement (APA) Application can be withdrawn at any time before finalization of terms APA team to include experts in economics, statistics, law or any other field APA authority may conduct meetings with taxpayer, make field visits or call for additional information/ document The tax payer who entered into an APA, would be required to file an annual compliance report to DGIT for each year covered under APA TPO shall carryout a compliance audit for each year covered under APA CA. Kiran Nisar 60
APA Overview of process Phase 1 Pre-filing discussion mandatory- no fees Details required in forms, include Unilateral v bilateral/ multilateral International transactions in prior 3 years Critical assumptions History of any previous CA request History of audits and appeals, etc We understand that understanding reached will be communicated Phase 2 Formal APA application before 1 st April Phase 3A Post filing meeting and negotiations Phase 3B Competent Authority negotiations for bilateral or multilateral APA Phase 4 Finalizing and signing an APA Phase 5 Annual compliance and monitoring Renewal of APA : Process similar to original APA, no pre-filing required CA. Kiran Nisar 61
Double taxation relief CA. Kiran Nisar 62
Avoidance of double taxation Exemption Method Particulars No exemption Full exemption Income 1,00,000 1,00,000 Less : Exemption 20,000 Taxable Income 1,00,000 80,000 Tax in country of residence 30,000 24,000 Tax in country of source 4,000 4,000 Total Tax 39,000 28,000 CA. Kiran Nisar 63
Avoidance of double taxation Credit Method Particulars No credit Full exemption Income 1,00,000 1,00,000 Tax in country of source 4,000 4,000 Tax in country of residence 30,000 30,000 Less : Foreign Tax Credit (4,000) Total tax payable Total Tax 39,000 30,000 CA. Kiran Nisar 64
Unilateral tax credit No DTAA Section 91 Person should be resident in India If he proves that: He had income which accrued or arose outside India in that previous year That income is not one which deemed to accrue or arise in India He has paid tax in any country with which there is no DTAA Credit = sum calculated by applying Indian rate of tax on doubly taxed income or income tax/ super tax actually paid in those country whichever is less CA. Kiran Nisar 65
Underlying Tax Credit (UTC) Available only to a Company DTAA with Singapore, Mauritius, USA, Australia, etc. Illustration : A Foreign Company (X Ltd.) has an Indian subsidiary Particular Amount Profit before tax of ICo 1,00,000 Less :Tax @ 30% 30,000 Profit after tax 70,000 Dividend distributed 30,000 70% of the equity is held by X Ltd Dividend to X Ltd. 21,000 UTC (21,000 * 30%) 6,300 CA. Kiran Nisar 66
Tax Sparing Resident state allows credit on deemed basis at the rate applicable in the source state even though the income is exempt India s treaty with Japan, Canada, Malaysia, Singapore, Kenya, etc. Particulars Amount No tax sparing Amount Tax sparing Profit of Indian branch 100 100 Tax paid in India 0 0 Tax in country of residence 35 35 Less : Tax Sparing relief (30) Tax liability in Country of Residence 35 5 CA. Kiran Nisar 67
THANKS CA. Kiran Nisar 68